This paper could be re-named "The Ontario Law of Vendor Disclosure Statements" because I believe that it refers to all of the Ontario Court decisions dealing with property information statements to date. These statements originated in the United States and first appeared in Ontario in the early 1990s. The use of Disclosure Statements is mandatory in some states but in Ontario, and elsewhere in Canada, they are voluntary although “strongly recommended” by real estate agents. As several agents have noted – if the Vendors won’t complete the Disclosure Statement, we wonder what they are trying to hide. The previous Conservative government was considering making the Statements mandatory. It will be interesting to see if the new Liberal Party will adopt the same position for Ontario.

I was originally critical of Disclosure Statements because:

1.They were an obvious attempt to protect the agents. See the last sentence in the first paragraph of the Ontario Real Estate Association (“OREA”) form: “The Broker/Sales Representative shall not be held responsible for the accuracy of any information contained herein” and see the last sentence of the last paragraph: “Note: sellers are responsible for the accuracy of all answers”.

I have since changed my mind in this regard because:

(a)nobody knows the property (and especially the latent defects) better than the owner/vendor;

(b)owners/vendors often hide latent defects from their agents; and

(c)if the roof leaks or the well goes dry the broker and the agent often get sued along with the vendors.

2.I am still critical because Disclosure Statements require Vendors to disclose more information than a Vendor would normally have to disclose – e.g. see the OREA Disclosure Statement under “General” item 12 – Local Levies and under item 13, Work Orders, or under "Environmental" item 4 – “Is the property within the jurisdiction of the Conservation Authority?”

What must a vendor disclose? Vendors have an obligation to disclose latent defects which render the property unfit for habitation or defects which render the property dangerous or likely to be dangerous. There is no duty to disclose defects which affect the value (only) of the lands. There is an obligation to disclose deficiencies discovered after the Agreement is signed but before closing. Nonetheless, vendors are not liable if they have no knowledge of the latent defect.

From a consumer protection standpoint a move away from the harshness of caveat emptor to a full disclosure model is defensible. The agents argue that by reducing the representations to writing there is less likelihood that the answers will be misinterpreted.

3.My third and main objection to Disclosure Statements is that the average layperson probably doesn’t understand many of the questions let alone know the correct answers:

4.

Question 2 Does anyone else have an interest in the property?

Question 4 Has there been a consent to sever within the last two years? (why the time restriction)?

(a)“The purpose of the disclosure statement is to raise questions and concerns rather than give detailed answers to the disclosures made.”

(b)“Although the property condition disclosure statement forms part of the agreement for a purchase and sale, it is not necessarily a warranty. Its main purpose is to put purchasers on notice with respect to known problems. The disclosure statement … merely indicates that the statements therein are true according to the seller’s current actual knowledge.”

(c)“The disclosure statement does not call upon a vendor to warrant a certain state of affairs. It requires the vendor to say no more than that he or she is or is not aware of problems”.

In Arsenault v. Pederson (1996) an unreported decision of the British Columbia Supreme Court, the court stated:

(a)“I have no idea who drafted these questions (in the disclosure statement) but they clearly are drawn in a manner offering more protection for a vendor than to a purchaser and in a manner to provide a salesperson or vendor with an air of rectitude which might not…be deserved”.

(b)“The title to the document (the Property Information Statement) is…a misnomer. It does not directly disclose the actual condition of the property. It requires the vendor to say no more than that he or she is not aware of problems.”

Representations and Warranties

One of the questions which the courts have been wrestling with is whether the statements contained in the Disclosure Statements are representations or warranties. The third sentence in the first paragraph of the OREA form states that “The information is being provided for information purposes only and is not a warranty”.

The OREA Real Estate Encyclopedia states that: “It is important to note that recommended warranty clauses usually state that the party represents and warrants. The two terms should be clearly differentiated".

“A warranty is a statement or covenant that is subsidiary or collateral to the contract. Breach of a warranty entitles the purchaser to damages only and does not permit the purchaser to rescind the contract. A representation is a statement made by one party to the other, before or at the time of contracting, regarding some existing fact, or some past event, which is one of the causes that induces a contract.”

In Ward v. Smith (cited above), the court continued “Representations are non-contractual. If they are not true the appropriate remedy is not an action for breach of contract, but the avoidance or rescission of a contract entered into in consequence of the representation, and, possibly, a tort action for damages. Thus…. a misrepresentation, may:

(1)entitle the representee to avoid the contract, if the representation was fraudulently made;

(2)entitle the representee to rescind the contract, if the representation was innocently made or;

(3)entitle the representee to sue, in tort, for damages if the representation was negligently made".

This is a leaking basement case - the new owners claimed that the vendors had concealed water stains by hiding them with furniture and boxes. One interesting point – the court referred to a line of authorities that holds that even where a latent defect is concealed without the intention of deceiving a purchaser, if it actually hides the defect the concealment is treated as a fraudulent misrepresentation of a latent defect. To make the vendor liable for a latent defect, the purchaser must satisfy the Court that the vendor had knowledge of the latent defect and has concealed it or is guilty of a reckless disregard of the truth or falsity of the representations. The vendors had signed a Property Information Statement in which they stated that they were not aware of any moisture problems in the basement. The court found that the answers to the questions were representations. The purchasers were aware of the contents of the Disclosure Statement but it was not attached to the Agreement of Purchase and Sale. This case is interesting because the Court held that the exclusionary clause (“This Agreement…shall constitute the entire agreement” – which is paragraph 25 of the OREA form of Agreement of Purchase and Sale) excluded the representations made in the Disclosure Statement (this position has been overturned by higher courts).

2.McQueen v. Kelly, [1999] O. J. No. 2481 (OSCJ)

This is another leaky basement case in which the vendors completed a Disclosure Statement confirming that they were not aware of any water or moisture problems. In fact, the vendors had stored boxes in the basement in order to conceal evidence of water damage which the court found to be fraudulent misrepresentation. The court called the purchasers foolish for not exercising their home inspection condition which was in the Agreement, but held that the vendors' representations, coupled with the intentional concealment of the water stains, permitted the purchasers to rely upon the representations and absolved them from having to have the house inspected. The Court overruled the Rampersad case and said that the exclusionary clause did not exclude the Vendor Disclosure Statement because “to do so would nullify the legal effect of the disclosures and warranties expressly set out in the information statement. The provision in the Disclosure Statement, requiring the vendors to disclose any important changes right up to closing, indicates an intention to perpetuate the warranties in the information statement beyond the time the contract for the sale of property was signed. This protects the warranty from being terminated by provisions such as the exclusionary clause”.

3.Morlani v. McCormack, [1999] O.J. No. 1697 (OSCJ)

Two RCMP Officers purchased property in 1992 and undertook numerous renovations especially to the bathroom and basement. The property was sold in 1995. The purchasers did not have a professional home inspection done. Some time after closing, the purchasers noticed moisture problems and eventually tore up part of the floor of the bathroom which disclosed poor workmanship, substantial leaking and rotting lumber. It turned out that the vendors had installed a plastic sheet underneath the bathroom floor which had helped to contain moisture seeping downward into the basement which had contributed to the rotting of the floor joists. The purchasers claimed that this was evidence that the vendors had actively concealed the moisture problem by installing the plastic sheet thereby preventing the leakage from appearing in the ceiling of the basement. Nevertheless, the Court held that the vendors would not have installed the plastic sheet in 1992 in order to conceal a defect when, at that time, they had no intention of selling the house. In 1992 the vendors had noticed that the northeast corner of the basement was damp to the touch but they testified that they had applied some sealant to the wall after which they could feel no more dampness. In 1993 the vendors encountered another leak in the basement but they applied more sealant and then drywalled the wall. The Court was satisfied that the vendors had not undertaken those renovations in order to conceal evidence of water seepage. In 1992 the vendors testified they had questioned their agent about the issue of basement leakage because they knew there had been dampness in 1992 and 1993. Her advice was to answer the question in the negative because they had no problems with basement dampness at the time they listed their house for sale in 1995. The Court concluded that the vendors honestly believed that there was no basement dampness at the time they completed the question in the Disclosure Statement and, accordingly, they were not liable for the damages suffered by the purchasers.

4.Swayze v. Robertson, [2001] O. J. No. 968 (OSCJ)

A year before the sale, the vendors had experienced leaking in the basement but had taken steps to correct the problem. They had signed a Disclosure Statement confirming that they were not currently experiencing water problems – they also stated that there was no history of cracks or water in the basement. The purchasers had a home inspection done and, even though the report stated that repairs would be required to the foundation to stop water leakage, they did not do any further investigations and completed their purchase. The court held that the vendors had made a false statement knowing it to be untrue or at least indifferent to its truth with the intention to mislead. The court could have found that because the purchasers had retained a home inspector, they were not relying upon the representations of the vendors, but the court did not find that they were so estopped. The court seems influenced by the fact that the inspection report was qualified and based upon only a visual inspection of the home. The court also rejected the vendors' argument that the exclusionary clause nullified the legal effect of the warranties set out in the Disclosure Statement (following the McQueen case).

5.Swayze v. Robertson, [2002] O. J. No. 785 (OSCJ – Divisional Court)

The vendors appealed to the Divisional Court but the appeal was dismissed. The Court held that “Although the purchasers obtained an Inspection Report, the trial judge was satisfied that the Report was of limited value to them and … they were unaware of the full nature of the defects, and the Report was insufficient to alert and inform them of the real problems”.

6.Moore v. Page, [2002] O.J. No. 2256 (OSCJ)

This is a structural defect and water leakage case involving a house that was constructed by an engineer/vendor. The vendor signed and delivered a Disclosure Statement indicating no problems which the court held were representations/warranties which had been made recklessly with disregard for the truth. This court also held that the exclusion clause did not exclude the disclosure statement. It is interesting that the Court was not critical of the purchasers for amending their Purchase Agreement by deleting their condition (i.e. conditional upon their obtaining a satisfactory building inspection) and relying, instead, on the “representations or warranties” contained in the written Disclosure Statement.

By way of interest there is a reference to the Chamberlain v. Gener (1997) B.C. unreported case which held that there could be no reliance on the Disclosure Statement if the purchaser had not seen it.

7.Gallagher v. Pettinger, [2003] O. J. No. 409 (OSCJ)

Boxes, which had allegedly hidden evidence of moisture, had been stored in the basement for several years. A professional home inspection was completed and the report, based on a visual inspection only, did remark on evidence of moisture penetration. On the Disclosure Statement the vendors indicated that the lot had flooded twice in 1987 and 1991. They also disclosed that the basement is “damp” but they otherwise indicated that they were not aware of any moisture or water problems in the basement. Eleven months after the purchase was completed, and after heavy rains, the basement flooded and the purchaser sued.

The court was satisfied that the vendors had not experienced flooding in the basement. The court found that it would not make sense for them to store valuable items in cardboard boxes placed on the basement floor if they were aware of water problems and therefore concluded that the vendors had not deliberately concealed moisture problems. Moreover, the court held that the home inspector or the purchasers could have requested that the boxes be moved in order to inspect the basement. The court held that the vendors had honestly completed the Disclosure Statement and that their additional remarks had put the purchasers on notice of potential flooding problems. The court was critical of the purchasers for making no further enquiries even though their home inspector advised them of the possibility of future water problems. The vendors had not negligently or recklessly made the statements in the Disclosure Statement because they were not aware of any actual problems and had given notice of the problems of which they were aware.

Most interesting is the court’s ruling that once the purchaser had retained the home inspector, any reliance on the vendor’s representations shifted to the inspector (citing Hoy v. Lozanoski (1987), 43 R.P.R. 296) “Absent fraudulent representations or concealment, when a professional home inspector’s report is obtained then reliance has shifted to the home inspector”.

The Disclosure Statement was attached to the Agreement of Purchase and Sale. The vendor made a true statement that the vendor was not aware of any defects in any appliances. Prior to closing, the dishwasher stopped operating and required substantial repairs The Court held that the vendors had an ongoing obligation to disclose changes which occurred after the statements had been given.

Conclusions

What advice can we give our clients:

1.At the present time, completion of the Disclosure Statement is voluntary – vendors should resist giving the Statement. But by refusing, suspicion will arise in the minds of your clients’ agent, the buyers’ agent and potential purchasers.

2.Purchasers should always request a copy of the Disclosure Statement before signing the Agreement. A copy of the Statement should be attached to the Agreement before signing. Remember that if your clients obtain a building inspection report they may be restricted to looking to the inspector (with all the qualifications and disclaimers contained in such reports) rather than relying on the Disclosure Statement.

3.If, when completing the Disclosure Statement form, the Vendors are not absolutely sure that they understand the question and know the answer, they should select “unknown”.

4.If uncertain, vendors should ask their broker or their agent for guidance in answering the questions and should add qualifications where necessary – as in the Morlani and Gallagher cases.

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OREA FORM – DOC NO. 68196

Bob Aaron is a Toronto real estate lawyer. He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818.

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The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA. Used under license